TiVo: Pac Crest Starts at Hold, $10 Target

By Tiernan Ray

Pacific Crest’s Andy Hargreaves today initiates coverage of TiVo (TIVO) with a Sector Perform rating and a “fair value” of $10, writing that the company is “well on its way to establishing a stable and profitable business in licensing and software sales” to the cable companies around the world, although “we do not see the potential for subscriber growth and incremental licensing revenue to exceed the expectations that are embedded in the current stock price.”

Cable providers are increasingly looking for more sophisticated “electronic program guides” of the kind TiVo offers as they try to compete with Internet-delivered TV, offering DVR capabilities but also subscription video from Netflix (NFLX), Amazon.com (AMZN), and Hulu, writes Hargreaves.

TiVo gets monthly service revenue from cable operators for its user guides based on subscriber count and TiVo technology used on the back end, he writes.

The company has built a more sophisticated program guide compared to competitors such as Rovi (ROVI) and privately held NDS, as well as internally-developed user guides the cable companies come up with:

Over the last several years, TiVo has evolved its retail DVR technologies into a world-class media center solution that is capable of aggregating, navigating and delivering content from all types of sources. TiVo is now applying the solutions it built for the retail market to the global MSO market, where it sells its advanced user interface on a per subscriber per month basis.

There’s also potential upside from advertising revenue, he writes.

The challenge for TiVO, writes Hargreaves, is that in some markets, the concentration of subscribers means some cable companies are big enough to go it their own way, developing their own software rather than partnering.

As a result, TiVo’s got to focus on smaller operators, those with fewer than 5 million subscribers. TiVo is in a good position to help providers with as few as 100,000 subscribers, he writes.

But lately, the company is on an upswing, gaining new contracts:

After over three years of subscriber losses in its MSO business, the launch of TiVo service at Virgin Media helped drive 407,000 net subscriber additions in TiVo’s MSO segment over the past two quarters. In addition to a continued rollout at Virgin Media, TiVo is in the early rollout stages or nearing launch at Ono, Charter, Suddenlink, Grande and RCN, which, along with Virgin Media, serve over 10 million customers. We expect TiVo’s relative success at these new customers to be the primary determinant of the company’s total subscriber base as well as its revenue and profitability through F2013. TiVo’s ability to build on its current momentum and add new MSO customers will determine its growth rate after that, in our view.

For this fiscal year ending in January of 2013, Hargreaves estimates $291 million in revenue, and a net loss of 37 cents.

That is above the average estimate on the Street of $274 million and a loss of 51 cents.

About Tech Trader Daily

Tech Trader Daily is a blog on technology investing written by Barron’s veteran Tiernan Ray. The blog provides news, analysis and original reporting on events important to investors in software, hardware, the Internet, telecommunications and related fields. Comments and tips can be sent to: techtraderdaily@barrons.com.